Author: Big Eyes

BYD has just released a very impressive semi-annual report, but the stock god Buffett quietly started to reduce its holdings in BYD.

According to the Hong Kong Stock Exchange (HKEX), Berkshire Hathaway, which is controlled by Buffett, sold 1.33 million H-shares of BYD at an average price of HKD 277.1 per share on August 24, reducing its stake in BYD to 19.92%. Referring to the holding as of June 30, Berkshire Hathaway still held 225 million shares, which means that Buffett has reduced his holdings by 6.281 million shares in the past two months. Nevertheless, even with a reduction of 6.281 million shares, Buffett still holds 219 million shares of BYD.

It is worth noting that since he first bought BYD at HKD 8 in 2008, Buffett has never reduced his holdings in the past 14 years until today. Although BYD’s official explanation is “not to over-interpret,” speculation about the stock god’s reduction in holdings will not stop there.

Giving up the last penny, or deceiving to buy low again?

On September 29, 2008, Buffett subscribed to 225 million shares of BYD’s stock at a price of HKD 8, with a total transaction price of USD 230 million. Since then, adhering to the philosophy of long-term investment, Buffett has not only not sold BYD’s stock, but also promoted BYD several times.

Based on the price of HKD 8, the average selling price of 1.33 million shares of BYD’s stock sold on August 24 is HKD 277.1016. The total amount of cash obtained is HKD 369 million, with an investment return rate of more than 33 times. From any perspective, Buffett has made a profitable investment, and the value investment theory has once again demonstrated its infinite charm.

However, with the news of Buffett’s reduction of BYD’s holdings being disclosed on August 30 by the HKEX, BYD’s stock opened with a large volume and fell sharply on August 31st, and the decline of A shares and HK shares exceeded 7%.

On the day before the news of Buffett’s reduction in holdings came out, BYD had just released a very impressive semi-annual report, which performed far beyond market expectations.“`markdown
In the first half of 2022, BYD achieved a total revenue of CNY 150.6 billion, a year-on-year increase of 66%. Among which, the revenue of the automotive sector was CNY 109.3 billion, a year-on-year increase of 130%. The net profit attributable to the parent company was CNY 3.6 billion, a year-on-year increase of 206%. In terms of automotive sales, the accumulated sales of BYD new energy vehicles exceeded 640,000 units, a year-on-year increase of 314.9%.

There are mainly two possibilities for Buffett’s reduction of BYD holdings:

1. Selling at a high price. Currently, BYD’s stock price is in a relatively high position. In the future, even if there is growth potential, the whole growth might come from the increase of the entire market, rather than BYD’s rapid growth due to its own technological advantages. Under this circumstance, the difficulty for BYD to outperform the market is increasing day by day. Therefore, not making the last penny and choosing to cash out at a high position when the good news is exhausted is a strategy commonly used by experienced investors like Buffett.

2. Tentative divestment. If looking more long-term, new energy vehicles and BYD’s energy storage technology still have broad growth prospects. If Buffett must layout a new energy vehicle company in his investment portfolio, then BYD is still a good choice. Therefore, by tentatively selling some of BYD’s stocks, if investors can follow the divestment and cause a drop in BYD’s stock price, then Buffett is completely capable of continuing to purchase BYD’s stocks at a lower price from the secondary market later.

Constant Enhancement of Core Technological Advantages

Blade battery and DMi hybrid technology are key reasons for BYD’s sustained and rapid growth in the domestic market. According to the retail data of domestic passenger car companies disclosed by the China Passenger Car Association in July, BYD ranked first with 158,957 vehicles, outperforming competitors such as North-South Volkswagen and Geely and Changan by force. Furthermore, its year-on-year growth rate of 172.6% leaves competitors far behind.

In order to consolidate its advantages in these two areas, BYD has launched CTB integrated battery car body and DM-p king hybrid technology in the first half of this year to continue strengthening its position in the new energy industry.

However, the competition in these two areas is currently increasing.

In terms of power batteries, the blade battery based on lithium iron phosphate has almost exhausted the upper limit of the energy density of lithium iron phosphate batteries, and in the future, BYD may also need to consider other cell technology routes to launch pure electric vehicles with longer cruising range.
“`The competition in the field of battery cells is fierce among competitors. Battery giants like CATL, SVOLT, and LG Energy Solution, as well as battery products from vehicle manufacturers such as GAC Aion and Beehive Energy, all make safety their greatest selling point. For example, General Motors’ Ultium platform seeks to achieve better results through needle puncture testing on NCM811 batteries with higher energy density.

As for the hybrid field, it is the most competitive sub-market among domestic brands. Aside from Toyota, which represents the hybrid technology of Japanese vehicles that cannot obtain green plates, in the past year or two, Chinese automakers such as Great Wall, Geely, and Changan have launched their own models with hybrid technology. Even pure electric vehicle models like Ideal, Dongfeng Voyah and NETA, as well as brands such as AITO and Questmobile, led by Huawei, are available for sale. In terms of technical indicators alone, BYD’s DMi model does not have generation-leading advantages.

The main reason why the BYD DMi model sells well is because of the engine’s higher thermal efficiency, the more stable performance of blade batteries, and the earlier product launch time.

To continue growing its market share in blade batteries and hybrid technology, BYD still faces significant challenges. It requires continuous technological iteration and investment in core technology research and development to maintain its existing advantages.

Intelligence is urgently needed, and strong foreign aid is essential. In the competition of intelligent EVs, it is not only a competition of electrification but also a competition of intelligence. Compared with BYD’s advantageous position in the establishment of the three-electric system, BYD still needs to make up for shortcomings in the field of intelligence. Whether it is the DiLink intelligent cockpit currently installed in BYD models, or the DiPilot advanced intelligent driving assistance system, there are no any remarkable highlights in confronting the mainstream level in the industry. Therefore, BYD is eager to introduce strong foreign aid in the field of intelligence.

One of the most representative is that in 2019, BYD introduced Huawei HiCar to the BYD Han. At the end of 2021, BYD also established a joint venture company named Dipai Zhixing with Momenta, a well-known domestic automatic driving technology company, to lay out high-level automatic driving technology with the help of Momenta’s technology. In March 2022, BYD also reached a cooperation agreement with Nvidia, and Nvidia’s DRIVE Hyperion platform will be installed in BYD’s models.

Apart from introducing top suppliers in the industry, BYD has also strategically invested in and laid out the upstream and downstream of autonomous driving industry chain, among which the most well-known is its strategic investment in automobile intelligent chip unicorn “Horizon” in 2021; In 2022, BYD invested in the well-known domestic LIDAR company SureStar.

The strategic investment in chips and LIDAR can not only provide guarantees for the future core hardware supply of BYD, but also generate considerable income after the two companies go public in their IPOs.

Compared with BYD’s expertise in the “three electric” technology, intelligent technology has similarities and differences.

The similarities lies in that both can master the core technology by self-research and then master the right to speak and negotiate of the entire industry. The difference is that compared with the three electric technology, intelligentization will produce more differentiation needs due to the different brand, product, and vehicle model positioning. And these differentiated needs cannot be achieved through a simple supplier cooperation mode. It requires BYD’s deep binding with partners and investment to make up for the shortcomings in software-driven smart cabin and intelligent driving.

Finally,

Purely based on the current market performance, it’s hard to judge whether Buffett’s reduction of 6.281 million shares is a harbinger of retreat or a signal from the god of stocks. But there is one data point that deserves attention: as of the close of August 31st, although it has experienced a significant pullback, the A-share price of BYD is still 287.98 yuan, and its P/E ratio is still as high as 153 times, while the P/E ratio of Shanghai Auto and Changan Auto is less than 10 times and 20 times respectively.

The high P/E ratio is actually determined by investors’ perception of BYD. If BYD is a high-tech company specializing in energy storage, then there is still a huge market space for BYD to grow in the future. If BYD is only satisfied with the core technology of “three electric” that it currently holds, then this stock price is already high. As for how to determine the positioning of BYD, I believe each investor has his own calculation.

At present, the biggest winner of this reduction event, in terms of the current stock price, is Buffett, who has been holding BYD for 14 years. I believe this will be another classic case in the investment history of the god of stocks.

For BYD and Wang Chuanfu, in order to truly break the “over-interpretation” of all parties, they can only hold on to the core technology they have studied in the past, and use technology that continually outperforms their rivals to gain more popularity.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.